(a)
Concept introduction:
Operating leverage is a cost-accounting formula which shows the percentage or degree increase in the operating income if a company increases its revenue or sale quantity.
When the two businesses are compared, the business with highest sale, highest gross profit margin and lower variable cost is more beneficial.
To compute:
The operating leverage of R and A.
(b)
Concept introduction:
Operating leverage is a cost-accounting formula which shows the percentage or degree increase in the operating income if a company increases its revenue or sale quantity.
To compute:
The reason that the companies with the same total sales and net operating income can have different degrees of operating leverage.
(c)
Concept introduction:
Operating leverage is a cost-accounting formula which shows the percentage or degree increase in the operating income if a company increases its revenue or sale quantity.
Both companies’ vulnerability to market fluctuations.
Want to see the full answer?
Check out a sample textbook solutionChapter 6 Solutions
MANAGERIAL ACCOUNTING W/CONNECT
- Answer the following question in essay. What do you understand by current ratio? What are it uses? What are its limitations? Ratio analysis is widely used as a tool of financial analysis, yet it suffers from various limitations. Explain. How can solvency of a firm be measured? What you understand by Liquidity ratios? Discuss their significance. Page 1 Module PSFM08 MANAGERIAL ACOUNTING WITH FINANCIAL ANALYSIS AND REPORTING Explain the importance of profitability ratio. How they are worked out?arrow_forwardWhich of the following statements about operating leverage is false? a. Operating leverage measures how operating income will be affected by changes in sales b. The degree of operating leverage is higher for companies with lower fixed costs c. Keeping all factors constant, the higher the contribution margin, the higher the operating leverage. d. All of the given answers are true. e. If the degree of operating leverage higher for a company, this means that the company is more risky than another company with low degree of operating leverage.arrow_forwardWhich of the following statements about operating leverage is false? O a. If the degree of operating leverage higher for a company, this means that the company is more riskyt another company with low degree of operating leverage. O b. Keeping all factors constant, the higher the contribution margin, the lower the operating leverage. O c. Operating leverage measures how operating income will be affected by changes in sales O d. All of the given answers are true. The degree of operating leverage is higher for comnanies with higher fived costs = here to search - hp %23 6. 7 V 3 4 W E R T' Y 岁 S D F G H K. V M. Σ 00 近arrow_forward
- Dupont Identity of this company Dupont: ROE = Profit Margin * Asset Turnover * Financial Leverage What is the general performance trend? What is the primary reason for that trend?What is one area that can improve in?arrow_forwardHelp with the realtionship between financial leverage and profitability. Pelican Paper, Inc., and Timberland Forest, Inc., are rivals in the manufacture of craft papers. Some financial statement values for each company follow. Use them in a ratio analysis that compares the firms' financial leverage and profitability. a. Calculate the following debt and coverage ratios for the two companies. Discuss their financial risk and ability to cover the costs in relation to each other. (1) Debt ratio (2) Times interest earned ratio b. Calculate the following profitability ratios for the two companies. Discuss their profitability relative to each other. (1) Operating profit margin (2) Net profit margin (3) Return on total assets (4) Return on common equity c. In what way has the larger debt of Timberland Forest made it more profitable than Pelican Paper? What are the risks that Timberland's investors undertake when they choose to purchase its stock instead of Pelican's?arrow_forwardPick two companies in the same industry.a. Determine their DOL, DFL, and DCL.b. What effect does a change in sales have on their operating income?c. What effect does a change in sales have on earnings per share?arrow_forward
- 1. Which of the following shows the degree of operating leverage? The percentage change in the sales volume as the result of the percentage change in cost of the goods sold The percentage change in the net income as the result of the percentage change in the variable costs The percentage change in the sales volume as the result of the percentage change in the sales price The percentage change in the net inome as the result of the percentage change in the sales volume The percentage change in the operating income as the result of the percentage change in the sales volumearrow_forwardThe ratio, Days Sales Outstanding (DSO) measures how quickly a company pays its vendors and suppliers. Select one: True False A company is using the same financial ratios to measure their performance across multiple divisions which are in different industry. This approach provides the company with the most accurate trend analysis. Select one: True False Examples of financial leverage include all of the below except for (select the one that does not apply): a. Issuing stock b. Equipment Loan c. Working Capital Line of Credit d. Business Credit Card e. A private loan from family which must be repaidarrow_forwardGive typing answer with explanation and conclusion 5. Which of the following statements is correct? A-- All the answers are correct. B-- A more direct method of calculating the DOL is to use the following equation is DOL = (Sales - Variable Costs)/EBIT. C-- Because the amount of debt is determined by managerial choice, the business risk that a firm faces is also determined by management. D-- Fixed costs are those costs that are expected to change at the same rate as the firm’s sales. E-- If a firm’s operating costs are all variable, then any variation in sales will be less than the variation in EBIT.arrow_forward
- The relationship between financial leverage and profitability Pelican Paper, Inc., and Timberland Forest, Inc., are rivals in the manufacture of craft papers. Some financial statement values for each company follow. Use them in a ratio analysis that compares the firms' financial leverage and profitability. a. Calculate the following debt and coverage ratios for the two companies. Discuss their financial risk and ability to cover the costs in relation to each other. (1) Debt ratio (2) Times interest earned ratio b. Calculate the following profitability ratios for the two companies. Discuss their profitability relative to each other. (1) Operating profit margin (2) Net profit margin (3) Return on total assets (4) Return on common equity c. In what way has the larger debt of Timberland Forest made it more profitable than Pelican Paper? What are the risks that Timberland's investors undertake when they choose to purchase its stock instead of Pelican's? a. The debt ratio for Pelican is %.…arrow_forwardBy modifying the break-even equation, a company is able to determine the sales required to earn a ________________ profit. a.banker's b.working capital c.target d. contributionarrow_forwardWhich of the following is not included in the Dupont framework? a. a measure of profitability c. a measure of leverage b. a measure of efficiency d. a measure of market sharearrow_forward
- Excel Applications for Accounting PrinciplesAccountingISBN:9781111581565Author:Gaylord N. SmithPublisher:Cengage LearningEBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENTCornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage Learning